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Bitcoin: The New “Digital Gold”

Following the housing market crash and the “Great Recession”, the stock market took a serious blow. As a result, many investors took their money out of volatile equity stocks and invested in relatively “safe” investments such as bonds and commodities. From 2007 to 2012, the price of gold more than tripled, rising from roughly $600 per ounce to $1800 per ounce. After five years of healing, the stock market finally started to rebound as investors gained enough faith in the economy to put their savings back in equities. Typically, the commodity market and equities market are negatively correlated, like this data suggests. Since 2012, as the economy has continued to recover, the stock market has steadily rose to all time highs. As we might expect, gold has conversely been plummeting, dipping below $1200 for the first time since 2011. However, while other commodities like oil have followed a similar path since 2007, there has been one consistent outlier: bitcoin.

Bitcoin is a virtual currency that allows users to exchange online credits for goods and services. First introduced in 2008 by an unidentified programmer under the name “Sotashi Nakamoto”, bitcoin can be created by computer programmers around the world through a complex process known as “mining”. With one bitcoin currently valued at almost $1600, successfully mining bitcoin is no simple task. Due to this nature of bitcoin, the Commodity Futures Trading Commission recently classified the cryptocurrency as a commodity in 2015. Since 2011, it has become exceedingly popular in money transfers. Bitcoin transactions occur directly between users and do not have a central authority, like a bank. Additionally, bitcoin transactions are pseudonymous. That is, they cannot be linked directly with an individual or entity, and are only traceable to a unique bitcoin address. As you would expect, because of this, bitcoin has developed an extensive criminal fan base. For years, bitcoin has been used as a medium of exchange on black market websites to aid the exchange of illicit merchandise such as guns, drugs and Fake ID’s (not that I would know). It should be noted that this is just one small percentage of bitcoin usage. Most of bitcoin transactions take place between individuals and/or legitimate businesses.

Today, while other commodities continued to plummet, bitcoin hit an all time high at $1,568.59. Over the past two weeks, bitcoin has increased by 25% in investor interest. This increase in attention was catalyzed by the U.S. Securities and Exchange Commission’s statement that said they would reconsider approving an exchange-rated fund or ETF that tracks bitcoin. The SEC had previously rejected the proposed ETF citing the lack of regulation of the bitcoin market. The most recent stimulus to the price of bitcoin can be attributed to Japan’s newly found interest in the digital currency. Having been given increased legal boundaries, more than 10 Japanese companies are launching digital currency exchanges. This excitement for bitcoin has sent a shockwave across the globe. Brian Kelly, founder of BKCM and manager of a digital assets hedge fund asserts, “Bitcoin can be thought of as digital gold. The upside for bitcoin is so much higher than upside for gold, in my view.”

Despite the high praise from Japan and individuals like Kelly, there are many that still have their doubts about bitcoin. Economists, Paul Krugman and Brad DeLong, have questioned whether or not bitcoin is a reasonably stable store of value. As of 2014, Bitcoin has volatility seven times greater than gold, and eighteen times that of the U.S. Dollar. Additionally, there is nothing underpinning the value of the bitcoin like the U.S. Dollar and Gold. Delong writes and Krugman comments in parentheses, “Underpinning the value of gold is that if all else fails you can use it to make pretty things. Underpinning the value of the dollar is a combination of (a) the fact that you can use them to pay your taxes to the U.S. government, and (b) that the Federal Reserve is a potential dollar sink and has promised to buy them back and extinguish them if their real value starts to sink at (much) more than 2%/year (yes, I know).” With no inherent value, there is no concrete price floor for bitcoin. Warrant Buffet has been known to agree with these two economists, publicly saying, “Stay away from it. It’s a mirage, basically.”

So what is the right move going forward? With countries just beginning to accept crypto currency as a medium of exchange, bitcoin has a huge upside that should be recognized. If the FEC ever approved an ETF that could give bitcoin an underlying value, the sky is the limit. However, there are serious risks that need to be taken into account. In the end, in terms of a commodity, bitcoin is the best investment on the market. As exemplified by the Fed’s continued efforts to steadily raise interest rates, the economy is still on the rise. With no recession in near sight, gold and oil do not look too promising. I’m hopping on the bitcoin bandwagon.

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2 thoughts on “Bitcoin: The New “Digital Gold””

I wonder what would prompt a company to start a digital currency? I see bitcoin as offering discreet transactions where almost all online transactions are very traceable. Where is the moneymaking potential in starting a new currency? Pure speculation by potential buyers? I find it hard to believe that a currency could survive for very long if it charged some kind of transaction fee without offering a valuable service to consumers.

I recently listened to an interesting podcast about bitcoin where it stated that part of the problem with bitcoin is that transactions are often lost or take an extremely long time to be transferred. Their argument was that there is no monitoring system with bitcoin so there is no penalty if the transaction does not go through. This could pose a problem if people begin to accept it as a medium of exchange when the money could potentially not be exchanged.